BFIN 22572 - Introduction to FinTech (PDF)

University of Kelaniya, Sri Lanka BFIN 22572 – FinTech Topic 01 – Introduction to Fintech Mr. Jayanath Samarawickrama B.Sc. Bus. Admin. (Information Systems) (Sp.) (USJ), M.Sc. (Computer...

University of Kelaniya, Sri Lanka BFIN 22572 – FinTech Topic 01 – Introduction to Fintech Mr. Jayanath Samarawickrama B.Sc. Bus. Admin. (Information Systems) (Sp.) (USJ), M.Sc. (Computer Science) (USJ), MCS (SL), Reading for PhD (USJ) Lecturer (Unconfirmed) Department of Finance E-Mail – [email protected] BFIN 22572 – FinTech 1  BFIN 22572 – FinTech 2 Describe the Evolution of FinTech Learning FinTech hubs Outcom es FinTech Vs. Tech Fin The impact of FinTech for transforming the economy  BFIN 22572 – FinTech 3 Overview and Definitions Topic Evolution of Fintech Outlin Fintech Hubs e The impact of FinTech for transforming the economy Fintech vs. Techfin Definitions FinTech – the application of technology to financial services (in the above sense the world’s largest banks are all FinTechs, but the term often reserved for start- ups) RegTech – the application of technology to regulation – both by banks to reduce compliance costs and by regulators to enhance regulation. TechFin – the application of financial techniques to Data – the data is typically acquired by being a Tech Company (such as Apple, Google or Baidu) or by an E- commerce Company (such as Amazon or Alibaba or potentially Woolworths or Coles). BFIN 22572 – FinTech 4  Fintech is abbreviation for Financial Technology. It simply refers to the application of cutting-edge technologies to improve financial services. Fintech is the term for the process through Fintech - which financial services providers incorporate Introducti technology to enhance the usability and on delivery of their products to customers. In some ways, technology has always aided the growth of the finance industry. Finance and technology have always gone hand in hand, from the early abacus to modern means of technology. BFIN 22572 – FinTech 5  From research done over the years, it has been evident that the future of fintech is blockchain. Blockchain is largely involved with storing Fintech - and processing information related to Introducti payment. This information if mishandled on can lead to fraud. Blockchain therefore verifies transactions to avoid such challenges. Both fintech and blockchain have been known worldwide due to how decentralized their operations are and this report shows its impact, advantages, and disadvantages. BFIN 22572 – FinTech 6  The marriage of financial services and Evolution technology has evolved over three of FinTech distinct time periods. BFIN 22572 – FinTech 7 FINTECH BFIN 22572 – FinTech HISTORY FINTECH 1.0 (1886-1967). This era is about infrastructure. This is an era when we can first start speaking about financial globalization. It started with technologies such as the telegraph as well as railroads and steamships that allowed for the first-time rapid transmission of financial information across borders. In 1918, the first electronic fund transfer system took place called fedwire. 8 FINTECH BFIN 22572 – FinTech 1.0 CONT….. Invention of Credit Cards The 1950s brought us credit cards to ease the burden of carrying cash. First, Diner’s Club introduced theirs in 1950, American Express Company followed with their own credit card in 1958. 9 FINTECH 2.0 (1967- BFIN 22572 – FinTech 2008) This era is about banks. This period marks the shift from analogue to digital and is led by traditional financial institutions. It was the launch of the 1st hand- held calculator and the first ATM installed by Barclays bank that marked the beginning of the modern period of fintech in 1967. 10 FINTECH 2.0 BFIN 22572 – FinTech (1967-2008) CONT….. Establishment of NASDAQ 1970s The world’s 1st digital stock exchange, which marked the beginning of how the financial markets operate today. In 1973, SWIFT (Society For Worldwide Interbank Financial Telecommunications) was established. 11 FINTECH 2.0 BFIN 22572 – FinTech (1967-2008) CONT….. The rise of bank mainframe computers The 1980s saw the rise of bank mainframe computers and the world is introduced to online banking, which flourished in 1990s with the Internet and e-commerce business models. Used in banking institutions store data pertaining to client records, domestic operations and other vital processing information. 12 FINTECH BFIN 22572 – FinTech 3.0 (2008- 2014) This era is about start- ups Due to Global Financial Crisis that later led to a general economic crisis become more widely understood, the public developed a distrust of the traditional banking system. This led to a shift in mindset and paved a way to a new industry 13  FINTECH 3.0 BFIN 22572 – FinTech (2008-2014) CONT….. The release of Bitcoin v0.1 in 2009 This had a major impact on the financial world followed by the boom of different cryptocurrencies (which, in turn, was followed by the great crypto crash in 2018). Mass-market penetration of smartphones 1 4 BFIN 22572 – FinTech FINTECH 3.5 (2014-2017) The era of globalization signals a move away from the western dominated financial world and aims at digital banking expansion around the globe, with improvements in fintech technology. This era is marked by an increasing number of new entrants and their last mover advantages. puts the focus on consumer behaviour and how they access the internet in the developing world E.g. Chinese and Indian markets that never had time to develop Western levels of physical banking infrastructure and so were open to new solutions more quickly 1 5 FINTECH 4.0 (2018- TODAY) This era is about disruptive technologies. Blockchain technologies and open banking Neo banks as game changer eg. German's N26 relaunched its premium account to cater to the specific needs and tastes of its subscribers, such as discounts in coworking spaces and in online travel booking sites. Integrated payment providers Mainstream use cases for NFTs https:// www.youtube.com/watch?v=LJ- BFIN 22572 – FinTech 16 ejvLgUBk  FinTech Hubs A FinTech hub is the focal point for FinTech activity within a region or a network. It is the ecosystem encompassing the entire infrastructure, organizations and people within the hub, as well as how those elements are organized and engage with each other. BFIN 22572 – FinTech 17 Top 10 global fintech hubs (Source: https://fintechmagazine.co m) Silicon Valley Stockholm Melbourne São Paulo London New York City Berlin Bengaluru Jakarta Beijing BFIN 22572 – FinTech 18  Silicon Valley The area has a fintech talent pool of approximately 74,000 people, over 300 startups (at the time of writing) and has so far attracted over $5bn in investment. Its reputation as a prime investment hub is further supplemented by 17,000 angel investors. There’s no shortage of big-name fintechs in the area; Square, Robinhood, Coinbase, and Stripe - currently the US’ most valuable startup - are just some of the global leaders housed in the Valley’s 47 square miles. Ranked as having the third-highest GDP per capita in the world, it’s clear that Silicon Valley has the resources and talent to maintain its position as the world’s foremost fintech hub for the foreseeable future. Most valuable fintech: Stripe Value (in USD): $95bn BFIN 22572 – FinTech 19  Stockholm This Swedish fintech hub is producing some of the most highly valued startups in the world and its success is no secret. Attracting approximately 20% of all sector investment across Europe, the foundations for Stockholm’s achievements were laid by prescient digital adoption, big-picture strategic planning, and an inclusive cultural backdrop. Although arguably not quite in the same technical league as our number one pick, the city is still home to several fintech leaders - Klarna and iZettle - as well as other big names in tech such as Spotify and Skype. Now with over 400 startups residing in Stockholm and over $1bn in capital flooding the market, it’s a tech-friendly hub that fosters innovation and generates world-leading results. Most valuable fintech: Klarna Value (in USD): $31bn BFIN 22572 – FinTech 20  Melbourne As fintech began gaining significant momentum around 2015/2016, Australia quickly established itself as a key player. Sydney might have a larger financial sector overall, but it is Melbourne that houses one of the world’s most valuable startups, Afterpay. Notably, Melbourne is also the country’s most tech-focused city. Driven by a highly skilled and diverse workforce, the city has over 330 fintechs and its top five alone are collectively valued at over $30bn. Most valuable fintech: Afterpay Value (in USD): $28.7bn BFIN 22572 – FinTech 21 São Paulo Breaking up the standard hegemony of Europe and North America in the fintech scene, Latin America is emerging as a force to be reckoned with, and São Paulo is its key hub. Brazil currently accounts for 51% of all fintech investment on the continent, with São Paulo housing some of the sector’s greatest success stories, including Nubank. Beyond banking, the city provides a robust and diverse ecosystem of capabilities, including payments, cryptocurrencies, lending, and more. Most valuable fintech: Nubank Value (in USD): $25bn BFIN 22572 – FinTech 22 London London is one of the world’s largest financial services markets. Such is the value of its unique blend of capabilities that Deloitte compared it to a hybrid of the New York’s ‘fin’ and the US’ West Coast ‘tech’ sectors respectively. With almost 1,000 startups reportedly taking up residence in the city and an estimated talent pool of 61,000, London’s reputation as a simultaneously established but also up-and- coming fintech hub is well- founded. Most valuable fintech: Checkout.com Value (in USD): $15bn BFIN 22572 – FinTech 23 New York City The most densely populated city in the US, NYC is arguably the world’s leading finance hub and until very recently was second only to Silicon Valley in terms of overall fintech investment. However, that changed in 2019 when its $1.9bn year-end result was pipped by London’s $3bn. Today, it is particularly notable for housing two of the most successful insurtechs in the space so far: Lemonade and Oscar. Most valuable fintech: Better.com Value (in USD): $6bn BFIN 22572 – FinTech 24 Berlin Berlin generates the second- highest amount of fintech investment in Europe per year, overtaken only by London. In fact, this German city might be poised to become London’s successor as the EU’s prime financial hub. A strong pool of skilled labour is available and leading challenger bank N26 is a testament to its technological development. With other Big Tech firms (Facebook and Airbnb) also opting to open offices in Berlin, we may indeed be witnessing its growth into a fintech hub of even greater renown. Most valuable fintech: N26 Value (in USD): $3.5bn BFIN 22572 – FinTech 25  Bengaluru Mumbai might be one of the first Indian cities that come to mind as a finance hub, yet Bengaluru has recently been given the accolade of the fastest-growing tech hub since 2016. One of the reasons for this includes government-led efforts to increase digital adoption throughout the country, including internet and smartphone penetration. Bengaluru’s workforce demographic is also perfectly configured to function as a fintech hub: technical skills in both finance and technology are readily available. Most valuable fintech: Razorpay Value (in USD): $3bn BFIN 22572 – FinTech 26  Jakarta Indonesia has historically struggled with financial inclusion, and it is perhaps to remedy this that Jakarta’s fintech sector has begun making promising gains in recent years. Payment service OVO (not to be confused with the energy company) is an individual highlight of the city’s growth as a fintech hub. Alternative, digital-based finance has also proved vital to the country’s post-COVID recovery roadmap, filling in the capacity that traditional banks, for instance, cannot accommodate. Most valuable fintech: OVO Value (in USD): $2.9bn BFIN 22572 – FinTech 27  Beijing Beijing’s status as a fintech hub is difficult to contend with - it has a substantial consumer market, cutting-edge technology, and is already ahead of many other nations in terms of emerging trends like CBDCs and blockchain. However, with the CCP taking a hard stance on monopolistic behavior, such as the cancellation of Ant Financials' IPO in 2020, harsh regulation could have a deleterious effect on development and innovation. Regardless, Beijing will likely remain a global fintech hub for the foreseeable future. Most valuable fintech: Waterdrop Value (in USD): $2.88bn BFIN 22572 – FinTech 28  With smart analytics, financial services organizations can now better understand and serve their consumers by utilizing the vast amounts of consumer data. Innovative financial services have been IMPACT developed by organizations with the use of technology OF Like this, block chain-based services will become more widespread in the years to FINTECH come as in the future there is a prospect that robo-advisory will play a big role. Businesses can focus on independent organization and innovation. Organizations may use the cloud's promise to improve cooperation and make procedures more transparent.  FURTHER SERVICE SCOPE -FINTECH ALLOWS COMPANIES TO USE INNOVATIVE TECHNOLOGY TO BROADEN THEIR REACH AND AREAS OF SERVICE. FINANCIAL TECHNOLOGY COMPANIES ARE MAKING GOOD USE OF MOBILE CONNECTIVITY. SPEED-WHEN YOU APPLY FOR ANY LOAN APPLICATION ONLINE., IT MUST BE AUTHORIZED ADVANTA BY DIGITAL- ONLY LENDERS THAT CAN PROVIDE SAME-DAY FUNDING, WHICH IS ONLY FEASIBLE BECAUSE OF FINTECH INNOVATION. GES OF FINTECH COST REDUCTION-FINTECH IS THE MOST COST- EFFECTIVE OPTION FOR CONSUMERS AND BUSINESSES ALIKE. IT SAVES MONEY BECAUSE THERE ARE NO HIDDEN FEES LIKE THERE ARE WITH TRADITIONAL BUSINESSES. FASTER RATE OF APPROVAL-THE RATE OF APPROVAL IS A DELINEATING FACTOR THAT MOST OF THE FINANCIAL SYSTEMS SHOULD WORK ON.  EFFICIENCY-. WHEN YOU USE FINANCIAL TECHNOLOGY, YOU ARE ALREADY EFFICIENT BECAUSE IT PROVIDES ADVANTA EXTREMELY PARTICULAR SERVICES. GES CONTD ADVANCED SECURITY- FINANCIAL INSTITUTIONS ARE ABLE TO PROVIDE CUSTOMERS WITH THE MOST ADVANCED SECURITY. ALSO, HIGH-END MONETARY SERVICES.  Technology based-risks- Since financial products are bought online, this may leave you more exposed to technology-based risks. These risks can be: Online hacking, application security risk, money laundering risk, digital identity risk and cloud-based security risks. Lack of Mobile and Tech Expertise- In the fintech industry, some of the finance companies or banks don’t DISADVANTAG have proper or convenient mobile banking services. ES OF Lack of regulation-the regulations around FINTECH fintech in the world are not perfect, and there is the possibility that some of these may be some potential fraud in the absence of regulation. Lack of physical branches-This can be a disadvantage in the provision of services, since everything must be dealt with via email or social networks. This is not good for customer relations because by limiting face-to face interaction, client-seller relationship is at risk of extinction.  Unclear rights-Fintech companies may be new to financial industry and use different business models to traditional providers making it harder to ascertain which ones are regulated, and what your rights are if something goes wrong. Making a rush decision- Since financial products are bought instantly online, without any face-to- face interaction or brokers, it may make DISADVANTAG consumers to easily make quick and uninformed decisions. ES CONTD.. Financial exclusion-While technology increases choice and access for most customers, it can exclude those who do not know how to use the internet or devices which computers, smartphones, and tablets. For instance, someone without a smart phone or without access to internet may not be able to access some of these online financial products like online application for loans.  Sale of customer data-Being an online DISADV platform, many people can access fintech or use fintech and this can put the ANTAGE information of clients at risk. For example, the Bank of America lost at S least $10 million because of an insider threat that sold about 300 customer data to cyber criminals, this was reported via CONTD.. an email by the banks’ chairperson Ms. Colleen Haggerty in 2011.  BFIN 22572 – FinTech 35 Digital Payments: Peer-to-peer payment networks, mobile wallets, and digital currencies have all been transformed by FinTech businesses, allowing consumers to conduct safe Applicati and practical transactions. Online lending: FinTech lending ons of platforms provide a variety of loan choices to both people and enterprises, utilizing cutting-edge FinTech algorithms to evaluate creditworthiness and expedite capital access. Robo-Advisory: Automated investment platforms using algorithms have been developed by FinTech to manage portfolios and offer individualized investment advice at a cheaper cost than traditional financial advisers.  BFIN 22572 – FinTech 36 INSURTECH: FINTECH ADVANCEMENTS IN THE INSURANCE INDUSTRY INCLUDE AUTOMATED CLAIMS PROCESSING, FASTER POLICY Applicati ISSUING, AND TAILORED INSURANCE PRODUCTS. THESE ons of INNOVATIONS INCREASE PRODUCTIVITY AND IMPROVE CLIENT SATISFACTION. FinTech PERSONAL FINANCE MANAGEMENT: FINTECH SOLUTIONS OFFER TOOLS FOR BUDGETING, COST MONITORING, AND FINANCIAL GOAL SETTING, HELPING USERS MANAGE THEIR FINANCES BETTER AND MAKE WISE DECISIONS.  Quick Processing People can carry out banking activities through their digital devices. This is because the form filling and application processing of microfinance institutions are moving online. Online Status Check Individuals can immediately know the stage that their application is currently in, thus they FEATUR can know the reason for a loan rejection. Also, through this transparency is increased. They also bring in a timely approach to application ES which in turn helps businessmen avail loan in the least possible time. Eliminating boundaries separating lenders and borrowers As compared to traditional systems and methods that brought about bottlenecks in Microfinance processes, Fintech involvement on microfinance has brought about ease in customer dealings and also easier and faster transactions LENDING APPLICATIONS Alternative lending models The offer fast approvals and funding Utilization of data Offer perks and savings Examples of digital lending applications include TALA, BRANCH and TIMIZA  Payment applications-PayPal, Venmo, Block (Square, Zelle, and CashApp. These apps make it easy to pay individuals or businesses online and in an instant. Personal finance applications-Mint, YNAB, and LENDING Quicken SimpliFi. These apps can assist you in tracking impending A P P L I C AT I O bill payments, identifying the categories in which you spend NS the most money, keeping track of your credit score, and managing your investment portfolio. Some even let you pay your bills straight through the app. Crypto apps-They include wallets, exchanges and payment applications enables you to store and conduct transactions in digital currencies and tokens like Bitcoin and NFTs.  P2P lending platforms-These are lending platforms that allow individuals and proprietors of small businesses to obtain loans from a variety of people who contribute microloans to them. Examples include Prosper, MyConstant, Funding Circle etc. This is how they work: you invest in a P2P platform LENDING which is the loan originator, the lending company lends money to borrowers, the borrower repays the A P P L I C AT I O loan inclusive of interest to the lending company and the lending company deducts a fee and NS transfers the rest back to your investor account InsurTech-This is the application of technological innovation to the insurance sector. For instance, drivers who have auto insurance receive payments based on their mileage. These miles are tracked in real-time by a telematics system within the car, allowing the premium to be computed and paid. This lowers errors while also streamlining the process.  “Fintech,” or financial technology, refers to a broad class of tech firms that offer financial services and goods through technology. This can encompass everything from online lending platforms to mobile payments. FinTech firms frequently employ cutting-edge technology like blockchain and artificial intelligence to offer creative solutions to long-standing financial issues. The phrase “TechFin” refers to the fusion FinTech vs. of technology and finance, which is relatively recent. New technologies are TechFin applied to financial services and products in this expanding industry. TechFin businesses often employ technology to streamline financial procedures and generate fresh economic goods and services. For instance, a TechFin business may use blockchain technology to construct a new decentralized payment system or artificial intelligence (AI) to improve credit rating algorithms. BFIN 22572 – FinTech 41  Digital wallets: TechFin firms use their current platforms to provide customers with digital wallet services, enabling smooth peer-to- peer and bill payment transactions inside their Use ecosystems. E-commerce Integration: TechFin businesses incorporate Cases financial services into their e-commerce platforms, allowing for customers to make payments, access financing alternatives, and TechFin manage orders without Cloud-based Financial leaving the platform. Infrastructure: TechFin firms use their strong cloud computing skills to offer safe and scalable financial infrastructure services to financial institutions, lowering costs and increasing operational effectiveness. BFIN 22572 – FinTech 42 Use Cases for TechFin DATA ANALYTICS AND OPEN BANKING: TECHFIN INSIGHTS: TECHFIN FIRMS SUPPORT PROGRAMS BUSINESSES EMPLOY THAT ENABLE FINANCIAL EXTENSIVE DATA ANALYTICS INSTITUTIONS TO SAFELY SKILLS TO EXAMINE EXCHANGE CONSUMER CONSUMER SPENDING DATA THROUGH APIS, HABITS, MARKET TRENDS, ENCOURAGING INNOVATION AND RISK FACTORS, GIVING AND DEVELOPING NEW FINANCIAL INSTITUTIONS FINANCIAL SERVICES AND HELPFUL INFORMATION FOR PARTNERSHIPS. PRODUCT CREATION, MARKETING, AND RISK MANAGEMENT. BFIN 22572 – FinTech 43  Difference Between Fintech and TechFin BFIN 22572 – FinTech Aspect FinTech TechFin Traditional Companies that use technology Definition technology to deliver companies entering financial services the finance sector Technology and Focus Financial services innovation in the finance sector Established Emerged as startups technology Origin disrupting traditional companies finance expanding into finance Technological Core Technology innovation, agility, Competenci infrastructure, data and customer-centric 4 4  Difference Between Fintech and TechFin BFIN 22572 – FinTech Aspect FinTech TechFin Payments, lending, Online platforms, Services investments, cloud computing, Offered insurance, personal data analytics, finance payments Challenging both Market Disrupted traditional traditional financial Disruption financial institutions and technology sectors Regulatory challenges Enhanced regulations Regulatory due to novel business due to increased Impact models market dominance Collaborate with Partner with Collaboratio traditional institutions established financial n and regulatory bodies institutions 4 5  Difference Between Fintech and TechFin BFIN 22572 – FinTech Aspect FinTech TechFin Focus on user-friendly Seamlessly integrate Customer interfaces and financial services into Experience seamless transactions daily activities Leverage existing Rapidly introduce new technologies to Innovation technologies and enhance financial business models services Competitiv Agility, innovation, Extensive technology e and customer-centric infrastructure, data Advantage approach analytics expertise s Stripe, Square, Google Pay, Apple Pay, Examples Robinhood, Ant Amazon Pay, Tencent, Group, Revolut WeChat Pay 4 6  Future of Banking: Techfin vs. Fintech At the nexus of FinTech and TechFin, where cutting-edge innovations and recognized technological titans are altering the financial environment, lies the future of banking. Let’s look at some prospective scenarios for banking in the future that both FinTech and TechFin will impact. BFIN 22572 – FinTech 47  Enhanced Digital Experience: As a result of FinTech and TechFin advancements, the banking sector will Future continue to prioritize digital experiences. Customers may anticipate more of streamlined interactions across numerous digital channels, tailored services, and user-friendly interfaces. Digital wallets, Bankin individualized financial management tools, and mobile banking will all spread much g: further. Techfin AI and Automation: Significant changes in banking procedures will be brought vs. about by AI and automation. Customers’ questions will be handled by chatbots and virtual assistants, who will also offer Fintec immediate assistance. AI algorithms will make more precise fraud detection, h individualized financial advice, and credit evaluations possible. Back-office activities will be streamlined through automation, increasing productivity and lowering expenses. BFIN 22572 – FinTech 48  Collaboration and Open Banking: As open banking efforts spread, customers Future can safely exchange their financial information with different organizations. This will make it easier for conventional of banks, FinTech startups, and TechFin enterprises to work together more often. Bankin New economic ecosystems will be created through partnerships and API connections, g: encouraging innovation and providing clients with broader services. Techfin Data-Driven Decision Making: Data vs. analytics and insights will play a significant role in banking’s future. Banks will use AI Fintec and machine learning algorithms to offer tailored financial products and services by h utilizing massive volumes of client data. Data security and privacy will continue to be essential for banks navigating this data- driven environment. BFIN 22572 – FinTech 49 Future of Blockchain and cryptocurrencies: Blockchain technology, which offers Bankin safe, open, and effective transactional methods, will keep up its disruption of the g: financial industry. Processes for trade financing, international payments, and Techfin identity verification will be made more accessible by distributed ledger vs. technology. Introducing cryptocurrencies and Central Bank Digital Currencies Fintec (CBDCs) may also alter the banking industry’s infrastructure and payment h BFIN 22572 – FinTech 50